A Beginner's Guide: How to Rent Your Ideas to Fortune 500 Companies (Plus: Video)

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stephen-key-photo.jpg

I first met Stephen Key in 2001. Two months later, I used a few recommendations of his — shared over the customary gin tonic — to help a friend double overseas sales in less than two weeks in New Zealand and Australia.

How? Licensing. It can be a beautifully elegant model.

Stephen is somewhat famous in inventing circles for two reasons. First, he consistently earns millions of dollars licensing his ideas to companies like Disney, Nestle, and Coca-Cola. Second, he is fast. It seldom takes him more than three weeks to go from idea to a signed deal.

He is not high-tech. There are no multi-year product development cycles. He specializes is creating simple products or improving upon existing products, often using nothing more than a single-sided drawing or photograph. Coupled with refined cold-calling skills, Stephen meets with some of the most influential marketing executives in the world. In this interview, we’ll explore how this advisor to American Inventor rents his ideas to Fortune 500 companies.

1- What exactly is licensing, and why is it a good option for people with ideas but little time or patience?

I think licensing is a bit of mystery to many people. It really doesn’t have to be.

Licensing is renting your idea to a manufacturer. The manufacturer handles the marketing, manufacturing, distribution and basically everything else required to bring the product to market.

Usually quarterly (four times a year), the manufacturer pays you a royalty on every unit they sell. This royalty—generally a percentage of the total wholesale price—is your payment for bringing them a new product idea that they can sell to their customers.

It’s an attractive low-risk alternative to manufacturing products and taking them to market yourself.

Using licensing, I can spend my time coming up with new product ideas instead of worrying about balance sheets, cash flow, employees and all the other hassles of running a company. I might pitch three ideas one month and no ideas for the next two months. You can have total flexibility with your work schedule.

Here’s one tip on how to make sure you get paid a certain amount four times a year.

Minimum Guarantees – So here’s why I use the term “renting” when describing licensing your idea to a manufacturer. It’s very important to make sure the manufacturer performs. You need a performance clause in the licensing contract. Without a performance clause, the manufacturer could just sit on the idea and do nothing with it. I’ve seen it happen.

Ensure you have a “Minimum Guarantee” clause in the contract. A minimum guarantee clause basically says the manufacturer needs to perform and sell a specified number of units every quarter or every year. Otherwise, you get your idea back and you can license your idea to another manufacturer.

It isn’t usually necessary to call in [enforce] the minimum guarantee clause. Most of the time you want to give the manufacturer a chance to perform. After all, you are partnering with them and they’ve spent big money on setting up their facilities to manufacture your new product.

Here’s another tip: Don’t front load the deal. I see many people with ideas doing this. They ask for large up front fees and make it to hard for the manufacturer to say yes to the deal. Instead ask only a small amount of money up front and scale up the minimum guarantees each quarter.

An example of minimum guarantees:
100,000 units quarter one
200,000 units quarter two
300,000 units quarter three

Let’s say the manufacturer sells 110,000 units quarter one. You would get paid a royalty on each of the 110,000 units sold.

Then let’s say the manufacturer only sells 190,000 units quarter two. The manufacturer can choose to pay you the royalty for the minimum 200,000 units they guaranteed you they would sell and they would retain the rights to manufacture your idea.

You should be OK with these “Minimum Guarantee” numbers since you set them up when you negotiated the contract. Set up numbers you think the manufacture can meet and that you’ll be OK with if the manufacture just meets the agreed upon “Minimum Guarantee”.

Of course you would prefer to earn royalties on 600,000 units every quarter, but you know you are guaranteed at least a certain “Minimum Guarantee” every quarter. This makes it nice when budgeting to buy that new sports car you’ve had your eye on.

2- I’ve heard you say that the most important thing you can do when licensing an idea is to spend as little time and money on the project before you get feedback from a manufacturer. Why?

Yes, that’s true. Unfortunately, it’s the exact opposite of what most people do. Most people go out and spend $3k to $20k or more on a patent and a few grand or more on a prototype first.

Time is the enemy in this process.

I’ve talked to inventors who have been contemplating or working on ideas for years. That’s not me. When I have an idea, it only takes me three days to three weeks to find out if the idea has legs.

On average, I recommend that my students take no longer than three weeks to three months before they make the decision to keep working on the project or dump the idea and move onto the next one.

Spend very little time or money on a project before you get feedback from manufacturers. The reason for this is simple: You’re not going to hit every idea out of the ballpark. Sometimes the benefits of the idea just aren’t intriguing enough. Maybe the idea has some manufacturing problems. Maybe the idea has been tried before and you didn’t find it with your research. There can be many reasons why manufacturers decide not to move forward with an idea.

You need to call a handful of potential manufacturers that might sell your idea. It takes very little time and next to no money to make the calls, and it’s the only way you’ll get the critical early-stage feedback.

File a provisional patent application ($100), create your sell sheet ($0-$80) and start making phone calls as soon as possible. That’s totally the opposite of what most people do. Most people dream or plan and research the idea to death.

The reality is that you will never be as knowledgeable about a particular industry as a manufacturer that been in the business for thirty years. They’ve seen everything imaginable in their product area. Their opinion is the only one that matters. Get your idea in front of them as soon as possible and get the feedback you need to pursue it or kill it.

Here’s a summary of my solution to the patent and prototype hang ups many people seem to have.

PATENTS:

PROBLEM (What most people do):

The majority of people I talk to think the first thing they need to do is go out and spend money to have an expensive patent filled by a patent attorney. Here’s why that’s wrong: Many times you’re going to get complaints from manufacturers that your idea needs to be fixed in one way or another. No problem. You’re creative and they aren’t. Go back to the drawing board and fix the problems the manufacturer presented.

The only problem is that if you’ve wasted $3k to $20k on a patent, now your going to need to file another patent covering the new features of your product. Another $3-20k? I don’t think so. There is a better way.

SOLUTION (My method for you):

Instead, spend $100 on a Provisional Patent Application (PPA). A PPA gives you one year to fish of the end of the pier to see if anyone is interested in your idea.

A PPA also allows you to say “patent pending.” It’s a huge benefit to the small guy! If you come up with a new version of your invention, just file another PPA with the additional features. With my approach, you should be able to get a “go” or “no go” in three weeks to three months.

Make sure to put another one to five months aside for negotiations and you’ll still have many months left on your twelve month PPA.

Then when you license your idea to a manufacturer, you’ll put in the contract that the manufacturer is responsible for paying your attorney to upgrade your PPA to a full patent and put it in your name! This is how I get multiple patents, in my name, paid for by manufacturers.

PROTOTYPES

PROBLEM (What most people do):

People think you need to have a polished and perfect prototype in order to sell an idea. I have sold many ideas with very simple prototypes and many without prototypes at all .

What people don’t understand is that you are not selling your prototype or your patent. I’ll say that again. You’re not selling your prototype or patent. You are selling the benefits of your idea.

SOLUTION (My method for you):

Create a sell sheet. What the heck is a “sell sheet”? It’s a regular 8 ½” x 11” piece of paper. It’s like an ad for your idea. It has the big benefit of your product in one sentence at the top, maybe a few sub benefits or features in bullets below and a picture or drawing of your idea. “Oh, but I have to build a prototype,” many will say. No, you don’t.

You don’t need a prototype until you get some interest. If you don’t get any interest, you haven’t wasted time on a prototype.

Your sell sheet should be like a billboard on the freeway. People should be able to glance at it for a few seconds and understand the benefit of buying your invention. They don’t need to understand every feature or hear you make clichéd statements like, “if we only sell this to 1% of all households in the country, this new idea will make millions”.

My one line benefit statement for one of my biggest ideas was, “I have a new label innovation that ads 75% more space to your container.” That’s it. I didn’t need to explain how when I called on the phone, they just wanted to know more.

Benefits, benefits. That’s what you are selling. Not your patent or prototype.


Stephen in motion: Repurposing existing products in 5 minutes for a call sheet model or prototype…

[To be continued in Part II: negotiated royalty rates, who to call within companies, product idea criteria, what product categories to avoid, and more]

Posted on: November 26, 2007.

Watch The Tim Ferriss Experiment, the new #1-rated TV show with "the world's best human guinea pig" (Newsweek), Tim Ferriss. It's Mythbusters meets Jackass. Shot and edited by the Emmy-award winning team behind Anthony Bourdain's No Reservations and Parts Unknown. Here's the trailer.

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435 comments on “A Beginner's Guide: How to Rent Your Ideas to Fortune 500 Companies (Plus: Video)

  1. Pingback: Taking Action
  2. Awesome tips Tim. Reading this approach a big “bell” went off in my head – along with the sound of my inner voice saying “duh!” – this is so much smarter than trying to handle everything yourself. I see usefulness for this approach not just in patentable inventions but all other aspects of virtually any type of business. I am immediately changing the way I handle all of my entrepreneurial activities based on this advice.

    Liked by 1 person

  3. Tim,

    Loved your book, which crystalized a number of things towards which I have been groping throughout my life as a micro-entrepreneur.

    As a writer/publisher, I thought the best way to say “Thank you!” would be with a suggestion for a minor copyediting correction in the next printing:

    The quote from Paul Theroux on page 248 should read, “It is fatal to know too much at the OUTSET . . .”

    Now try to get your pubisher to fix it! ROFL.

    Like

  4. Tim, I am not sure how you can have your hand in so many different pies at the same time , and be an expert at all of them … but this is amazing.
    I have been stuck in this ‘patent-invention-marketing’ area for over 10 years. I have not found the financial resources needed to patent my ideas. Or I would find the cost of patents and patent searches too intimidating when I am not guaranteed anything for my time and expense….

    But … after reading this blog today … I think I can finally move forward!! Thanks a million!!

    Like

  5. Sorry to say that, but this kinda awakens the skeptic in me. If it’s really that easy, why is there a $400 course needed for this? And the “This is how I earned a brazillian dollars!” success stories don’t help much.

    I’m not sayin that it’s snake oil, but as much business advice, it sounds a bit too repeatable, Charles Atlas-style.

    Like

  6. Thank you for sharing! It’s wonderful to have found other people out there who show such a zest for learning and for life, and willing to share that with others. I’ve been toying with a patentable idea for a month or so now, so this is timely.

    Now, it’s just a matter of making heads or tails of the provisional patent information on the UPTO site ;)

    Thank you!

    Like

    • I bought your book “One simple Idea”. After reading it i knew I was at the point of making contact. So far I have made a few submissions but no replies. Should I keep calling until I get an answer or just simply move on.
      Does it matter who licenses it or will any company be ok? I have IP for world wide coverage and a working protoype. Initial surveying shows 97% of people would buy the product. The cover letter and sell sheet are in place but no results. Any thing you can suggest will be appreciated. Thank you in advance.

      Like

      • how do i find these companies that rent ideas? i have a few and would liketo try a tleast one and see if this is real or a scam//ill use one that wont hurt if it fails [Moderator: phone number deleted] thanks

        Like

  7. What are some examples of actual things Stephen has done/does? Examples of what he’s taken to specific manufacturers and licensed to them that we’d know about?

    This sounds great and all, but I’m just not wrapping my head around coming up with a billion “ideas”, and turning around every few weeks and selling those “ideas” to somebody. Anyone can come up with hairbrained ideas….what makes this case so special?

    Pardon my skepticism :-)

    Like

  8. Tim,

    This is another great post. Super helpful.

    I have been playing with a couple ideas for licensing and patents for a few years, but have not had the money to file them and risk the time and money to build a prototype and this post was like a huge weight lifted off my shoulders.

    Awesome.

    I have the ability to move forward and see what happens now without much risk. Thanks!

    B

    Like

  9. Tim, I appreciate you presenting this topic…

    I am working in the field of character licensing with both new and niche market properties that definitely are not (yet) household names like Dora or SpongeBob.

    This may be out of Stephen’s expertise, but can he speak to how his strategies might be modified to benefit artistic Intellectual Property? It seems that the pitch to manufacturers in character licensing is much more about “riding an already established wave” than taking a risk on an “unproven” market presence.

    Does this mean that the Goliaths of the industry (Disney, Nickelodeon, etc.) will always have the advantage of sheer cash to throw around and impress potential partners? Or are there guerilla, “new rich” techniques that you and/or Stephen can suggest?

    Thanks again for the covering licensing. I like forward to the rest of the series.

    Like

  10. Tim, good suggestion about the provisional patent. From what my inventor friends tell me that’s the way to go. Not only protects your idea, but also makes companies more willing to deal with you because in a way it protects them too. You can of course only patent ideas for things that are functional, as opposed to aesthetic. For images and words you would get a copyright.

    Like

  11. Hi Tim, I loved your book! Keep up the insightful work. I’ve never heard of this approach with patents and have been at a road block myself because of the filing costs.

    Thanks Much, Melin

    Like

  12. Tim,

    Great post but two points:

    1) While intrigued, I, too, am a bit skeptic. This seems too easy.

    2) I think your readers (well, at least me) would love some information on selling one’s ideas to a company and how to avoid getting ripped-off.

    That is, XYZ company sees your nifty invention, likes it. Creates something similar that it can patent and then runs with it, leaving you in dust and uncompensated for your hard work and inspiration.

    Like

    • I to would like to safeguard myself from the XYZ company who sees it’s a great idea and makes minor changes and leaves me with no recourse.

      Like

      • You can cover this by having a good patent application. Read the wording, ask an industry expert to read it, get an alternative patent lawyer to critisize it etc, amend. This is a question of validity/scope of meaning and quality control.

        Like

  13. Pete wrote. . .
    “What are some examples of actual things Stephen has done/does? Examples of what he’s taken to specific manufacturers and licensed to them that we’d know about?

    This sounds great and all, but I’m just not wrapping my head around coming up with a billion “ideas”, and turning around every few weeks and selling those “ideas” to somebody. Anyone can come up with hairbrained ideas….what makes this case so special?

    Pardon my skepticism :-)”

    Hello Pete,

    You can view many of the products I’ve licensed by visiting my website and viewing the projects on the right side of my home page.

    Your right about coming up with ideas. It’s much easier to come up with ideas than to sell them.

    I teach some techniques for coming up with ideas, but knowing how to sell those ideas is the part most people don’t understand and the part of the process that I really emphasize.

    Knowing how to sell a new product is absolutely critical.If you don’t pick up the phone and call some manufacturers, the idea will just be in your head and it won’t go anywhere.

    I’m doing a free tele-seminar (phone seminar) this Wednesday. It’s totally free and there will be no big sales pitch for my course.

    It’s my way of helping out people who are new to the game.

    You can sign up for the tele-seminar for free, just go to the news page on my website.

    I wish you much success in all your invention related endeavors.

    Stephen Key

    Like

  14. Stacia wrote. . .

    “Thank you for sharing! It’s wonderful to have found other people out there who show such a zest for learning and for life, and willing to share that with others. I’ve been toying with a patentable idea for a month or so now, so this is timely.

    Now, it’s just a matter of making heads or tails of the provisional patent information on the UPTO site ;)

    Thank you!”

    Hello Stacia,

    I love your positive attitude! Here are a few words of advice.

    The patent office web site is great for doing patent searches, but won’t show you step by step how to file a provisional patent.

    The book “Patent Pending In 24 Hours” on my web sites resource page will show you step by step in common English how to file a provisional patent application. It’s a great book. I have no self interest in promoting the book. You can buy it at any book store.

    What the book won’t tell you is how to sell your ideas. 97% of all patents never make any more money for the inventor than the inventor spent on the patent.

    This is because most people thing the first ting to do is file a patent. It’s most definitley not!

    My advice is to do some solid research of the marketplace before you even spend the time to file a provisional patent. Patents don’t sell themselves.

    I wish you much success with your projects.

    Stephen Key

    Like

  15. This IS the SOLUTION for us “IDEA GUYS”!

    Awesome post Tim, thanks! I invented a residential illuminated address sign back in ’91. It was by far the best design on the market and could be manufactured at a great price. Because I was a perfectionist, I did the manufacturing and marketing all myself. Although I had started selling and earning a living only 2 years after concept, I wasn’t satisfied and wanted to take the product and marketing from 80% quality to 99%. That took 5 more years.

    I ENDED UP BURNT-OUT AND BROKE so I sold the company. Some successful (Porsche & Ferrari driving) young entrepreneurs bought it for a royalty (with no minimums) then shelved the idea. Over the 2 following years they lead me on, I went bankrupt and split with my wife and two year old. Turns out the “young entrepreneurs” were actually lawyers! They finally sold the company for $100 and gave me my one-sixth share. That was 9 years of my life, over $100k in manufacturing equipment and patents for $16.66.

    I HATE LAWYERS. I rented some trucks and thugs and went to the new company who bought my biz and reclaimed all my equipment. Then I visited my contact from the young lawyers. Actually I followed him to work and when he was stopped at an intersection, I took my tire iron, went over to his car, and SMASHED IN HIS DRIVER’S SIDE WINDOW, then dragged him out through it and expressed my feelings. I was very lucky to find a judge who was quite empathetic.

    WHEN I GOT OUT OF JAIL, I was truly renewed. I started another business right away, this time bootstrapping it and test marketing it before investing any money. In just 6 months it was worth over $2 MILLION and I paid off my investors from the first biz.

    Since then I’ve created an entrepreneur education program that teaches how to start any business from nothing using an initial promotion which not only test markets the concept, but if it’s successful, it can entirely finance your venture.

    ~Victory Darwin

    p.s. I’m really looking forward to part 2 of the Steven Key story. Everything he says about the PPA and sell-sheet instead of prototype is right on and yet hardly anybody knows it. Dan Kennedy taught me the DIY method to starting a biz, which is to create a promo, send it out, and get orders. If you say “allow 4-6 weeks for delivery” you then have that window to get producing the product.

    Like

  16. video isn’t working. “we’re sorry this video is no longer available”.

    p.s. did you do the PR teleseminar yet? (the $125 one)

    Like

  17. Licensing sounds like the ultimate form of outsourcing for idea guys like me. I was about to part with $399 for his program and I noticed his checkout has a coupon code!

    so Mr. Ferriss can you give your bud Stephen Key a call and get us loyal 4hww readers a FERRISS50 ?

    thanks!
    V.

    Like